Buy Rural Electrification Corp Ltd for the Target Rs 435 by Motilal Oswal Financial Services Ltd
Weak quarter; PPoP miss from elevated exchange losses Loan book broadly flat YoY; earnings in line due to provision writeback
* Rural Electrification Corp’s (REC) 1QFY27 PAT declined ~7% YoY to INR41.5b (inline). NII in 1QFY27 declined ~2% YoY to ~INR54.4b (inline).
* Other income stood at -INR1.5b due to a net loss on investments of INR3b (PQ: -INR634m and PY: -INR5.8b). This included fee and commission income of INR1.1b (PQ: INR2.5b and PY: INR1.4b). Exchange loss during the quarter stood at INR9.1b (PQ: INR942m and PY: INR515m).
* Opex declined 11% YoY to ~INR1.2b (~54% below est). The cost-to-income ratio stood at ~2.3% (PQ: 6.7% and PY: 2.5%). PPoP declined ~16% YoY to INR42.5b (~20% miss). Provisions writebacks for the quarter stood at INR9.6b (vs. est. provision writebacks of INR1b). This translated into annualized credit costs of -16bp (PY: -11bp and PQ: 10bp).
* REC declared its first interim dividend of INR4.25/share.
NIM dips ~40bp YoY; CoB declines ~20bp QoQ
* Yields (calc.) declined ~5bp QoQ to ~9.55% while CoB (calc.) declined ~20bp QoQ to ~6.9%, resulting in spreads (calc.) rising ~15bp QoQ to ~2.63%.
* Reported NIM for 1Q contracted declined ~40bp YoY to ~3.34% (FY26: 3.43%). We expect REC to maintain a NIM of ~3.7% over FY27-28E. (FY26: 3.8%)
Loan growth muted, driven by weak disbursements
* The loan book stood at INR5.9t and rose ~1% YoY/QoQ. Repayments declined sequentially to ~18.8% (PQ: 30.2% and PY: 29.5%). The renewable loan book grew 23% YoY to INR786b and forms ~13% of the overall loan mix.
* Disbursements in 1QFY27 were weak and declined 43% YoY to INR337b. We now estimate REC to deliver an AUM CAGR of ~9% over FY26-28.
Asset quality stable; PCR on standard assets declines sequentially
* GS3 and NS3 were broadly stable QoQ at ~0.23% and 0.11%, respectively. S3 PCR was stable at ~51.2% (PQ: ~51%). Standard assets (Stage 1 and 2) PCR declined ~20bp QoQ to 0.85% (PQ: 1.06%) and led to a provision write-back.
* We model REC’s credit costs to remain benign at ~20bp over FY27-FY28E.
* CRAR stood at ~23.1% as of Jun’26.
Valuation and view
* REC reported a subdued quarter, with the loan book growing modestly by ~1% YoY and remaining broadly flat QoQ. Disbursements continued to remain weak, although repayments moderated sequentially in 1QFY27. Reported NIM declined YoY and QoQ amid pressure on yields, while asset quality remained broadly stable during the quarter.
* REC trades at an attractive valuation of 1x FY27E P/ABV. However, weak loan growth and pressure on margins remain the key monitorables. We raise our FY27 EPS by ~3% to factor in higher provision writebacks and cut our FY28 EPS by 3% to factor in lower loan growth. We model a CAGR of 9%/3% in loans/PAT over FY26-28E. We expect REC to deliver a RoA/RoE of 2.4%/17% in FY28E. Reiterate BUY with a TP of INR435 (premised on 1.1x FY28E BVPS).
Key risks:
1) sustained weak loan growth
2) compression in spreads/margins amid high competition.
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